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Moody's upgrades E*TRADE to B1 with a positive outlook

08 Jun 2014

New York, June 08, 2014 -- Moody's Investors Service upgraded E*TRADE Financial Corporation's
senior debt rating to B1 from B2. E*TRADE Bank's bank
financial strength rating was upgraded to D from D-, mapping
to a baseline credit assessment of ba2, and its long-term
deposit rating was upgraded to Ba2 from Ba3. The upgrades result
from E*TRADE's improved financial performance and the success
of management's efforts to mitigate balance sheet exposures.

The rating outlook is positive, indicating a higher likelihood of
an upward rating change over the medium term. Future rating momentum
will depend upon further improvements in, and stability of,
financial performance; developments in the management of the bank's
loan portfolio as well as the maturation of its wider enterprise risk
management framework; and developments in the longer-term
strategic direction of the company, including the solidification
of its capital policy.

E*TRADE Financial Corporation's (ETFC or the company) B1 rating
reflects its resilient retail discount brokerage franchise that has continued
to perform well despite the challenges facing E*TRADE Bank.
Its retail broker generates strong cash flows and gross margins,
and has contributed to a gradual improvement in our measures of the company's
EBITDA and debt leverage in recent years. The trends of its operating
measures such as daily average revenue trades, average revenue per
trade and number of customer accounts have continued to be generally comparable
to its investment grade peers in the same sector, indicating that
it has a strong and resilient brand, a key credit strength.

There have been several notable positive developments over the last year
in ETFC's efforts to mitigate its balance sheet exposures,
following its bank's aggressive investments into first lien mortgages
and home equity loans prior to the financial crisis, and re-focus
on its core franchise.

These efforts include continued improvements in the bank's regulatory
capital, which contributed to it obtaining regulatory approval to
recommence dividend flows from the bank up to ETFC (which have amounted
to $325 million to date), thus benefitting the parent's
debt service capacity; the April 2014 sale of its non-core
market-making business (G1 Execution Services); and the recent
bulk sale of $0.8 billion of first lien mortgages at a small
gain, most of which has previously been modified as troubled debt
restructurings.

In addition to the company's balance sheet risk mitigation efforts,
there has been significant change in the composition of the board and
senior management during the last 12-18 months, resulting
in a stronger and more coherent leadership framework than existed previously.
A key challenge for the company going forward, following this transition,
is to build a level of stability in oversight, management and governance,
and place more emphasis on developing the company's longer-term
strategic and capital management priorities.

ETFC still has exposure to home equity loans and lines of credit (HELOCs)
amounting to almost 100% of its tangible common equity, although
this ratio has come down significantly in recent years, as the company's
capital position has improved and the strengthened housing market has
eased the pressure on borrowers to some extent. The bulk of the
HELOCs will begin to amortize in 2015 and 2016, and as such the
borrowers' pending increased payments present a looming credit risk
to the company. However, to date it has made good progress
in managing this exposure, assisted by the improved and more stable
economic environment. As well, its capital base is expected
to be sufficient to manage even a significant increase in provisions that
could result from the HELOCs beginning to amortize.

Continued improvements to the customer franchise and financial performance,
evidenced by improved and less volatile operating metrics and a more diverse
revenue base, would be positive for the rating. The management
of improved cash flows in a prudent, creditor-friendly manner
would support such upward rating pressure. The continued development
of a coherent risk management and governance framework, including
further mitigation of the loan portfolio risk exposure, would also
be viewed positively.

What Could Change the Rating -- Down

Signs of an increased risk appetite, such as investing in riskier
assets, would be negative for the rating, as would a significant
deterioration in the performance of the loan portfolio. Additionally,
material deterioration of the operating metrics or capital ratios would
result in downward rating pressure.

ETFC is a New York based financial services company that provides brokerage
and related products and services primarily to individual retail investors.
In its latest fiscal year ended December 2013 it reported net revenue
of $1.7 billion, pre-tax income of $195
million and total assets of $46 billion.

The methodologies used in these ratings were Global Securities Industry
Methodology published in May 2013, and Global Banks published in
May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.

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